Monopoly - Oligopoly

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1. Perfect competition and the Monopoly
a. In what ways is the monopoly different from perfect competition? In what ways are they alike? Discuss explaining the conditions necessary for each of these market structures.

Monopoly is different from perfect competition in a number of ways. They are as follows:

 Market control: In monopoly there is only single seller in the market. The single seller has the complete market control over the market. On the other hand, in perfect competition, there are many buyers and many sellers. No single seller or firm has the control over the market.

 Number of firms: Perfect competition is a market structure comprises of large number of small firms. Any single firm has absolutely no control over the market. But in case of monopoly, there is only one single seller with complete market power.

 Availability of substitutes: All the firms in perfect competition produce homogeneous goods. An infinite number of substitutes are available in perfect competition. But there is no close substitute in monopoly as the monopolist sells a unique product in the market.
 Control over price: The monopolist has the perfect control over both price and quantity. The monopolist can decide the equilibrium price or the equilibrium quantity in the market. On the other hand, perfectly competitive firms have no control over price. Price is determined by the industry and the competitive firms have to accept that price.
 Demand curve: As the monopoly can decide its own price, the monopolist faces downward sloping demand curve. B On the other hand, the demand curve for the perfectly competitive firm is perfectly horizontal (perfectly elastic) as the market price is determined by the intersection of industry demand and supply curve.
 Entry and exit of the firms: There is free entry and exit of the firms in case of perfect competition which implies there are no barriers to entry and exit in the market. In monopoly there are barriers to entry and exit of firms. .
 Information: So far information is concerned; all the perfectly competitive firms have the same information regarding the price and production technique. But the monopolist often has the information unknown to others.

 Economic profit: The monopolist can earn positive economic profit both in the short run and in the long run. The perfectly competitive firms can earn positive or negative economic profits in the short run but in the long run, they can earn only normal economic profits due to free entry and exit of firms.
 Equilibrium price and quantity: The equilibrium price for monopolist is more than the perfectly competitive firms but the equilibrium quantity is less than perfect competition.

 Profit maximizing condition: the profit maximizing condition for monopolist is MR=MC. But as price is given for perfect competitive firms the profit maximizing condition becomes P=AR=MR=MC( because in perfect competition P=AR=MR)

 Supply curve: the positively-sloped marginal cost curve for each perfectly competitive firm is its supply curve. This ensures that the supply curve for a perfectly competitive market is also positively sloped. The marginal cost curve for a monopoly is NOT, the firm's supply curve. There is NO positively-sloped supply curve for a market controlled by a monopoly

 Allocative efficiency : The perfectly competitive firms achieved allocative efficiency as P= MC condition is satisfied there. But in monopoly no allocative efficiency can be achieved.

 Productive efficiency: As, in the long run the firms produce at the minimum point of the ATC, production efficiency can also be achieved in perfect competition. But in monopoly no production efficiency can be achieved.

 Consumer surplus: When the demand for a good or service is perfectly elastic, consumer surplus is zero because the price that people pay matches precisely the price they are willing to pay. This is most likely to happen in highly competitive markets where each individual firm is assumed to be a 'price taker' in their chosen market and must sell as much as it can at the ruling market price. But in case of monopoly there is a greater potential consumer surplus because there are some buyers willing to pay a high price to continue consuming the product.

 Price discrimination: the monopolist can discriminate price, that is, they can charge different prices to different buyers . But there is no question of price discrimination in perfect competition they have absolutely NO control over market price.

Perfectly competitive firms and monopoly firms are alike in the following ways:

 Profit maximizing goal: Both the perfectly competitive firms and the monopolist firm want to maximize their profit.

 Profit maximizing condition : Profit maximize conditions for both the market structure are same:

1) MR=MC
2) The MC must cut the MR from below.
Since P is horizontal in perfect competition, the profit maximizing condition can be written as,
P=AR=MR=MC

 Economic profit: Both the perfectly competitive firms and the monopolist firms can earn positive economic profit in the short run.

b. How and why can the monopoly engage in price discrimination? Give examples.

Price discrimination is nothing but charging the different prices to different buyers for the same product. Due to its market power, the monopolist firm can discriminate prices and can earn more profit.

Requirements for price discrimination

Three conditions must be satisfied for price discrimination:

1. Firms must have some monopoly power.
2. There must have at least two classes of customers with different elasticities.
3. The products cannot be resold in other market.

There are mainly three types of price discrimination:

First Degree price discrimination: This is a form of price discrimination in which a seller charges the highest price that buyers are willing and able to pay for each quantity of output sold. This is sometimes called ...